Finance Ministry, Sebi question mutual funds on Franklin Templeton fiasco

Industry experts said Franklin’s action would impact as many as 310,000 investors, of whom 300,000 are retail and high net worth investors
The finance ministry and the Securities and Exchange Board of India (Sebi) had discussions with the mutual fund (MF) industry on Sunday to assess the fallout of the Franklin Templeton fiasco. The regulators and the ministry are worried about the impact of Franklin Templeton MF’s move to wind up six of its debt schemes, and its repercussions on the corporate debt market. 

Industry experts said Franklin’s action would impact as many as 310,000 investors, of whom 300,000 are retail and high net worth investors. 

Industry players had conference calls on Sunday afternoon, first with Sebi, followed by another call with the finance ministry. The latter call was attended by Sebi, a few members of the Association of Mutual Funds in India (Amfi), and finance ministry officials. 

Meanwhile, sources said the government had given the go-ahead to the Reserve Bank of India (RBI) to ensure there was no liquidity issue. It is learnt that the central bank is looking at options. 

 

 
Anticipating a run on fixed-income schemes from investors, following Franklin Templeton’s surprise move, MFs are seeking a liquidity window from the Reserve Bank of India (RBI), like it did in 2008 and 2013. However, the RBI has not yet acceded to the industry’s request for a special window.  

Industry executives said even though the RBI has enabled the targeted long-term repo window to give liquidity to bonds of non-banking financial companies (NBFCs) and other stressed corporates, liquidity was not reaching lower down the credit curve, with banks also in risk-aversion mode. A 10 per cent credit guarantee scheme, announced in the 2019-20 Budget, which would enable state-owned banks to purchase pooled assets of financially sound NBFCs amounting to Rs 1 trillion has also not taken off. 

Thus, the fund industry has expectations of the RBI opening the credit window to bring stability.

“Even if the RBI announces a window of Rs 10,000 crore on Monday, the industry would be relieved. The access to liquidity will help calm things down, even if there is redemption pressure on Monday. Investors get worried in the absence of liquidity,” said an MF expert.

There are also worries that the Franklin problem may have a wider impact on the debt market. On Friday, the corporate bond market felt the tremors caused by the surprise winding-up of the schemes. Yields in corporate debt market moved up by 20-25 basis points (bps), leading to widening of the spread between government securities and corporate debt papers. This could increase the cost of borrowing further. “If MF participation in debt markets dips, that would further hurt the liquidity and lead to higher yields for corporates,” said a bond market dealer. 

“Given the large participating that MFs have in the bond markets, it is important that regulatory bodies look at interlinkages in the system, to curb further risks and contagion,” said Rajiv Shastri, an MF industry and debt market expert.
MF distributors also said investors would have exposure to other debt schemes, besides the Franklin Templeton schemes. “The negative impact of Franklin has made them relook at their investments in other debt schemes as well,” said Srikanth Matrubai, chief executive officer, SriKavi Wealth.

MFs were seeking enhanced borrowing limits from Sebi as a precautionary measure to deal with anticipated redemption pressures. Accordingly, Sebi has increased the limit to 30 per cent on a case-by-case basis. According to distributors and senior MF executives, there is a strong demand that Franklin Templeton should open up a special window that will allow retail investors, with investments up to Rs 1-2 lakh, to exit the six schemes. 

 

 
According to the data from Amfi, the credit risk fund category has seen its assets under management (AUM) dip by another 12 per cent in April to Rs 48,392 crore, followed by medium duration fund, where the AUM is down by another 9 per cent to Rs 25,502 crore.

Industry executives suggest redemptions in some categories have continued in light of the perception risks created by Franklin Templeton MF’s decision to wind up six of its managed credit schemes.

“A large part of the redemptions is on account of the risk perceptions surrounding certain categories of fixed-income schemes,” said an industry source. 

Advisors said investors have now become even more wary of their investments in fixed-income scheme as the lockdown has already created cash-flow issues. "Given the developing issues, clients are looking at alternatives," said Ritesh Sheth, co-founder, Tejas Consultancy.
With inputs from Anup Roy



Business Standard is now on Telegram.
For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel